October 2017 Market Review and Outlook

Nov 1, 2017

October has often been a spooky month for the markets. This past month we marked the 30th anniversary of “Black Monday”, which occurred on October 19, 1987, when the US stock market crashed and the Dow lost more than 22% in a single day. The S&P 500 also dropped nearly 17% during the month of October in 2008. Yet this year, the uncanny bull run-up in stocks that began last year continued to roar through the month, with the S&P 500 gaining 2.2%. The Dow rose 4.3% and the Nasdaq climbed 3.6%. All three indices posted their biggest monthly percentage rise since February. In addition, the Dow and S&P 500 both marked their seventh consecutive monthly gains – a feat last accomplished more than four years ago. The primary catalysts to the markets rise were positive earnings reports, greater-than-expected GDP growth in the 3rd quarter, and continued optimism for tax reform.

Eight of the eleven S&P sectors posted positive returns over the month. Technology shares rose the most, gaining 6%, primarily due to strong earnings from Amazon and Google. Technology still leads the sectors for the year thru October, rising over 26%. Utilities were the runner-up for the month, with a 3.8% gain, followed by Materials, with a 6.59% rise. Consumer Staples again was the worst-performing sector for the month, losing -2.5%, while Energy lost -1.2% and Health Care declined -.58%. Energy remains the only sector in the red for the year to date, having lost more than -10% this year.

During October the yield on the 10-year Treasury rose about 5 basis points – a relative benign monthly movement. Investors are awaiting the conclusion of a two-day Federal Reserve policy meeting that many provide clues about monetary policy and possible interest rate hikes. The probability of a rate increase in December has risen to more than 97%, having been as low as 86% a few weeks ago.

West Texas Intermediate for December rose 23 cents, or 0.4%, to settle at $54.38 a barrel, lifting the contract’s monthly gain to roughly 4.7%. Based on the front-month November contract at the end of September, prices climbed 5.2% for the month. A drop in US crude supplies by more than 5 million barrels, a decline of more than 7 million barrels of gasoline stockpiles, and continued extension of production cuts by OPEC through 2018 contributed to the gains.

Once again, economic indicators showed mostly positive monthly results. The Chicago PMI jumped to 66.2 in October from 65.2 in September, showing an acceleration in private sector activity. Any reading above 50 indicates improving conditions. The consumer confidence index climbed to a 17 year high in October to 125.9, the best reading since December 2000. US employment costs rose 0.7% in the third quarter, and the Case/Shiller home price index rose a seasonally adjusted 0.5% during the 3-month period ending in August – stronger than expected. The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.5% in September on a seasonally adjusted basis. Over the last 12 months, the all-items index rose 2.2 percent.

With two months remaining in 2017, it appears that despite geopolitical concerns and a lack of substance to budget and tax law changes, we are on course to end 2017 in the black. But the rising bullishness in the markets may be a contrarian signal. The legendary investor John Templeton once said that bull markets are “born on pessimism, grown on skepticism, mature on optimism, and die on euphoria”. Without the ability to accurately predict the market’s top or bottom, the most prudent course is to remain properly allocated and diversified to achieve your long-term investment goals.